Minggu, 17 Juli 2011

Price movements were mixed across the complex yesterday. Broad market sentiment received some support from a stronger-than-expected Q2 China GDP growth figure as well as indications from Fed Chairman Bernanke of the potential for additional policy support (if needed), although this was tempered by the on-going challenges presented by the peripheral Europe debt crisis.

The strongest performer on the day was nickel, which rose by 1.4%, while Lead was the weakest, falling by 1%. Indeed, the past month has seen Nickel being strong, rising by close to 12% from its low in mid-June. This performance is in-line with our expectations given that the refined nickel market has been the only base metal in a market deficit, clearly supported by a sustained downward trend in LME stock levels (down by 32Kt, -21% YTD).

In turn, in our view, we certainly lacked a clear justification for nickel prices to be trading into the cost curve, which was the case in mid-June when the profit margins of high-to-medium grade nickel pig iron (NPI) producers in China were being pressured when the LME front-month contract was trading close to $21,000/t. Moreover, the latest flow of data from China suggests that despite concerns over rising NPI output, which have been invigorated by the 62% rise in ore imports year-to-date, refined nickel demand is also in robust health.

For January to May, apparent consumption of refined nickel rose by an impressive 21%, second only to lead across the complex in strength with no indications this had been distorted by any restocking effects. The release of the NBS June refined production figure yesterday, which offered a robust 48% y/y growth in output, indicates that this positive demand trend is continuing into the middle of the year.
Moreover, Chinese refined nickel prices continue to trade at a robust premium to LME, averaging $3,700/t since the beginning of June, only mildly lower than the April-May average of $3,870/t, offering few signs of oversupply. Moreover, while Q3 stainless output in China is anticipated to be close to flat y/y as well as q/q, Q4 is expected to be a record period for production levels and with indications of significant substitution from 200 (low nickel) to 300 (high nickel) series stainless in 2011, refined Nickel demand appears set to improve towards year-end.

eyond China, softer stainless demand conditions are anticipated in both the US and Europe in Q3 and to some degree this is evidenced by the recent performance of physical premia. In Europe at least, nickel premiums have fallen firmly over the past week, with Metal Bulletin reporting premiums for uncut cathodes have fallen to $100-150/t from $150-200/t, as 4x4 cathodes and nickel briquettes have also softened to $300-350/t from $350-400/t. The supply-side of the nickel market has also captured significant attention for the level of disruptions experienced in 2011 and yesterday saw an announcement from Minara Resources that the recent suspension of production at its Murrin Murrin high-pressure acid leach (HPAL) facility owing to a technical problem has resulted in the company reducing its production guidance from 33-37Kt down to 29-32Kt for 2011.

By implication, the loss of production could be as great as 8Kt versus initial expectations, and demonstrates that even for an apparent success story for HPAL facilities, the susceptibility to disruption and lost output remains high. Finally, the quarterly results of the major miners have begun to be published for Q2 giving some indication of production performance during the period. Rio Tinto Q2 11 mined Copper production fell by a massive 24% y/y, owing largely to lower ore head grades at 630Ktpy Escondida and 211Ktpy Kennecott Utah Copper.

Mined production at Escondida fell 23% y/y during H1 11 and 31% y/y in Q2 11, while refined output rose by 8% and fell by 4%, respectively, as ore grades fell from 1.4% to 1.06%. Kennecott Utah mined copper output fell by 17% y/y in Q2 11 and output for the year will be lower as production moved through lower grade areas of the pit. Due to changes in metal sharing and lower ore grades, Rio’s share of production from Grasberg fell dramatically (by 64%). The full picture of mine output for this mine will be published in Freeport-McMoRan’s results on 21 July.